Global Carbon Emission Market: The Infancy of a Major Commodity Market

by Axel Pierron, December 18, 2008

Abstract

Paris, France 18 December 2008

Global Carbon Emission Market: The Infancy of a Major Commodity Market

The carbon emission market has been growing at an astounding rate: over 73% in terms of volume and over 88% in terms of value. Short-term growth looks moderate, but the long-term outlook is promising. In an optimistic scenario, the global carbon emission market could reach over US$2,000 billion by 2020 and become one of the largest commodities markets.

The size of the carbon emission market stood at almost US$65 billion in 2007, and it is expected to reach $115 billion by year’s end. A new report, Global Carbon Emission Market: The Infancy of a Major Commodity Market, provides a comprehensive market overview, covering trends and developments happening in the emission market and their impact on future market growth. The market’s growth will depend on the regulatory framework set in the future, particularly in the post-2012 phase. This will include expansion of regulation into new sectors and geographies. With the current economic downturn, growth projections should be taken with a grain of salt, because the future of the emission market future is strongly related to the economy’s growth.

The number of schemes being implemented or considered reveals a clear shift in governments’ views of global warming. Nevertheless, discrepancies in terms of industrial bases are driving different regions to adopt heterogeneous carbon reduction schemes.

"These differences are essential in ensuring an efficient and flexible approach to carbon reduction," says Axel Pierron, Celent SVP and co-author of the report. "However, they will pose an issue regarding the emergence of a global carbon emission market. A few structural changes might be necessary before the emission initiatives go into global mode. In the meantime, the role of the Clean Development Mechanism for arbitrage activities will be reinforced."

The emissions market has moved from a compliance driven market to one focused on investment, with several financial developments in carbon trading. Many companies with a specialized interest in emissions trading have evolved and big financial institutions have set up carbon trading desks. These financial institutions have brought in a new level of sophistication in product structuring. The derivatives market offers a host of products like forwards, futures, options, swaps.

"The financialization of the carbon market will create more consistency in terms of revenue stream," says Ranjit Behera, analyst at Celent and co-author of the report. "The market has gone a step further by forming specialized products for retail investors. This evolution will increase the liquidity and efficiency of the market."

In this report, Celent provides a detailed overview of the various global schemes being implemented to reduce carbon emissions, analyzing their impact on the growth of the carbon emission market. The report goes on to analyze the various components of the carbon markets (EU ETS, CDM&JI markets). Finally, it investigates opportunities for investment, examining the drivers of price formation, the correlation between carbon emission instruments and economic indices, and the alternatives for investing in the carbon emission markets.

The report’s table of contents is available online.

of Celent's Commodities research service can download the report electronically by clicking on the icon to the left. Non-members should contact info@celent.com for more information.  

Celent is a research and advisory firm dedicated to helping financial institutions formulate comprehensive business and technology strategies. Celent publishes reports identifying trends and best practices in financial services technology and conducts consulting engagements for financial institutions looking to use technology to enhance existing business processes or launch new business strategies. With a team of internationally based analysts, Celent is uniquely positioned to offer strategic advice and market insights on a global basis. Celent is a member of the Oliver Wyman Group, which is a wholly-owned operating unit of Marsh & McLennan Companies [NYSE: MMC].

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Table of Contents

Paris, France 18 December 2008

Global Carbon Emission Market

Executive Summary 3
Introduction 5
Emission Market Framework 7
Market Overview 21
CDM and JI Market 29
Investing in Carbon Emission Markets 35
Conclusion 48

 

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